An initial public offering, or IPO, is when a company issues its first shares of stock to the public. By giving up part of the ownership to stockholders, a company theoretically raises a large amount of money to fund expansion and continue to grow. Public companies usually receive lower interest rates when issuing debt, can increase market share and issue secondary offerings, thus making it easier to arrange mergers and acquisitions. On the other hand, the IPO process entails a lot of work. Public companies are regulated by the Securities and Exchange Commission (SEC) and must meet their costly regulatory requirements. They must comply with added disclosure for investors, and incur additional costs such as financial reporting documents, audit fees, investor relation departments, and accounting oversight committees. Although the overall economic value of IPOs is hard to measure, a healthy IPO market can correlate to overall economic innovation. In the last few years, there has been a decline in IPO offerings, implicating slow years in the market for new stocks. According to research by Credit Suisse, in 1996 there were 7,322 publicly traded companies, and today, the number of companies listed on the United States stock market has dropped by half. This decline has been attributed to regulation, waves of mergers and acquisitions that have caused many stocks to be delisted, and to mutual funds and big investors who tend to prefer big investments to small investments in new company offerings. More importantly, younger companies, specifically in technology, are now able to raise huge amounts of capital privately without the need of public markets.
A lot of companies choose not to IPO because they don’t want to share all of their information and risk their biggest competitors looking at their S-1 (prospectus), especially when there is a possibility of not completing the offering. Some advisors estimate that approximately 75% of companies that file for an IPO do not go public. For example, Trustwave Holdings Inc., a Chicago-based company, filed to go public in 2011 but was unable to complete an offering, therefore its prospectus was floating around for almost three years. In the last few years, more entrepreneurs complained that going public wasn’t worth the difficulty and expense, therefore leading them to sell their companies. According to Dealogic, tech IPOs declined from 47 in 2007, to 24 in 2010/2011, in contrast to tech mergers and acquisitions which rose 44% to ~2,500 deals a year. In 2012, there were just 186 IPO filings in the US, compared with the average of 341 from 2000-2011. As a result, on April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act with the intention of encouraging more companies to consider going public, resulting in more choices for investors, job creation, and a stronger U.S. economy. JOBS required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements.
A provision of the JOBS Act allows “emerging-growth companies” with less than $1B in revenue to file plans for public offerings in secret until just before they start pitching their IPOS to big institutional investors. This allows companies to keep delicate financial information away from competitors, the media, and the investment community until the company decides to make it public until just 21 days before the IPO presentation series, or roadshow. The JOBS Act also permits companies to file fewer, less detailed financial statements, requiring the audited financials of the last two years instead of three years, as traditional IPOs do. In addition, a stealth IPO allows companies to resolve SEC questions privately. According to Steven Kaplan, a finance professor at the University of Chicago, the advantage of going to the SEC in preliminary filing and being examined before everything is public is a very positive thing for companies that aren’t sure if they want to go public or not. Prospective IPO candidates can also meet with big institutions, like Fidelity Investments, during the stealth period to test their interest and gather comments. This would have benefited Groupon, who faced a surge of media attention when their accounting practices were questioned by the SEC, causing the company to adjust its revenue and income numbers before its roadshow. By getting feedback from the SEC and certain investors, companies can evaluate if they are ready to do an IPO and easily back away off if the response is not the desired one. Brett Paschke, head of equity capital markets at William Blair & Co, expressed that companies may also announce a confidential filing in a news release to “invite bids from potential acquirers”, and Colin Diamond, attorney at White & Case, adds that when “people know the company is serious about going public, that is a really strong motivator for a potential buyer”.
The threshold annual gross revenue of $1B had barred some companies from being able to take advantage of what the JOBS act has to offer. Following a slower year in the market for new stocks, Walter J. Clayton’s first major policy move as chairman of the Securities Exchange Commission was expanding JOBS, and since July 10, 2017, all companies have access to the program. Companies are now required to file their paperwork publicly at least 15 days before their roadshow. The new rules also offer companies the option of entirely withdrawing the filing in the event of a market downturn or another setback. Anna Pinedo, a partner at Morrison and Foerster, said that the expansion on confidential filing also applies to companies that are not seeking to raise capital through a public offering but are considering direct listing on a stock exchange. Until now, companies contemplating a direct listing had to make its filing public when it applied. Currently, it is said that Spotify is considering a direct listing, which would make its shares simply begin trading on an exchange, eliminate the need to hire underwriters and conduct a roadshow to entice investors. The new law also extended the stealth provision to foreign companies looking to sell stock in the United States. Adena Friedman, chief executive of Nasdaq, expressed her support by stating: “We have long supported such an action and believe it is one step forward in making the public markets more attractive, which will foster economic growth”.
According to a scholarly paper, stealth filing has proved popular since its introduction, with 126 of 294 eligible companies, such as Snapchat, Twitter, and Shake Shack, opting for the quiet method. In addition, the SEC declares that since the JOBS Act was enacted, some 1,350 confidential filings have been submitted as of March 31, 2017. From 2012 to 2015, the SEC had received stealth IPO filings from about 850 companies; however, only 479 of those filings led to an IPO. The rest of the other 400 companies that filed secretly may haven’t gone public yet, are either bidding their time, lost momentum, or were acquired. According to Renaissance Capital, in 2015 only 115 companies went public, a decrease of 33% from 2014. Although confidentiality is intended to revitalize the public capital markets, some specialists believe that confidential filing has had little impact and emphasizes secrecy over openness. The stealth filing process has also confronted roadblocks, including drawing scrutiny for limiting the information available to investors and the public until just three weeks before a roadshow. By having an obscured view of the backlog of an IPO, not only does market analysis becomes less accurate, but it can also alter the public perception of a company’s financial health. Others are skeptical of emerging-growth companies relying too much on their existing investment community when going public, as well as whether such filings benefit investors or just the companies.